Hsinjing Holding (GTSM:3713) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Hsinjing Holding Co., Ltd. (GTSM:3713) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hsinjing Holding

What Is Hsinjing Holding's Net Debt?

As you can see below, at the end of December 2020, Hsinjing Holding had NT$65.3m of debt, up from NT$18.5m a year ago. Click the image for more detail. On the flip side, it has NT$51.0m in cash leading to net debt of about NT$14.4m.

A Look At Hsinjing Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Hsinjing Holding had liabilities of NT$204.2m due within 12 months and liabilities of NT$36.8m due beyond that. Offsetting these obligations, it had cash of NT$51.0m as well as receivables valued at NT$28.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$161.3m.

Given Hsinjing Holding has a market capitalization of NT$3.80b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Hsinjing Holding has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hsinjing Holding will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Hsinjing Holding had a loss before interest and tax, and actually shrunk its revenue by 40%, to NT$169m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hsinjing Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$7.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$15m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hsinjing Holding , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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